The Senate approved two nominations and continued negotiations to craft a fifth stimulus bill to counter the health and economic effects of COVID-19 (see below). The House scheduled no votes this week.
The Senate will continue its negotiations over a COVID-19 stimulus bill. The House is standing by and will vote on any COVID-related bill the Senate may agree to.
Stimulus 4: The Next Stimulus Bill.
As expected, bipartisan negotiations advanced very slowly this week. Any expectations for a deal by the end of this week, as many had hoped for, were never realistic given the significant differences between Democratic and Republican leaders. There are some areas of common ground, including additional funding for COVID-19 testing, vaccine development and schools as well as improvements to the Paycheck Protection Program (the Treasury-SBA small business lending program). But, significant differences remain on several major issues, including the level of the enhanced benefit under the unemployment insurance program, state and local funding (beyond schools) and liability protections for businesses, schools and other entities (see below). Majorities of both parties still want a deal, but the possibility of no deal at all cannot be overlooked. We are still slightly optimistic that a deal will come together, possibly right before the Democratic Convention that begins on August 17. The longer a deal takes to materialize, the higher the price tag.
The three issues that are the biggest potential stumbling blocks likely will be resolved last. The first is the level of an extra weekly unemployment benefit on top of the normal benefit. In an earlier stimulus bill in late March, Congress provided an extra $600 per week to those filing for unemployment assistance. One study estimates that 70% of beneficiaries have received a higher payment through this extra assistance than wages when they were employed. The extra $600 benefit will likely be reduced, perhaps to an amount in the $450 range through December 31. The second issue is whether state and local governments should receive additional funding beyond the $150 billion they received in an earlier stimulus bill (as well as the additional funding for schools proposed in this round of stimulus). Senate Republicans did not include any additional funds in their draft bill, while House Democrats provided close to $1 trillion of support in a bill they passed in May. The third issue is liability protection for businesses, schools and other entities as they try to reopen. Some form of temporary protection is likely, though adherence to strong federal health and safety standards will be a precondition for coverage. Only when we see movement on these issues will we know that a deal is close.
Post Office in Prime Time.
Democratic negotiators requested that new funding for the US Postal Service be added to the next stimulus bill. The concerns that have triggered the funding request include reports that mail service has been disrupted in many cities due to personnel shortages. Additionally, Democrats insist that the Postal Service needs to be prepared for the large influx of voting ballots made through the mail anticipated in this year's election. Democrats have asked for $10 billion to help the Postal Service. As the Postal Service has lost business over the years to personal delivery competitors and consumers' increasing use of paying bills online, the agency has hit hard financial times. While the stimulus bill is unlikely to address those broader problems, we believe it will provide some additional funding for the Postal Service, albeit at a lower level than what Democrats are seeking.
State and Local Tax Deduction.
We have received numerous questions about the state and local tax (SALT) deduction that was limited by the 2017 tax reform bill since Senate Minority Leader Chuck Schumer (D-NY) has raised this issue as part of this round of stimulus negotiations. As a reminder, the 2017 tax law capped the SALT deduction at $10,000. The deduction tends to impact taxpayers in high tax states, such as New York, New Jersey and California, among others. A repeal of the SALT cap is highly unlikely in this current stimulus bill and any other legislation this year. If former Vice President Biden wins the presidential race and Democrats secure control of both the House and Senate, a reinstatement of the deduction will be in play next year. We think limited relief is more likely than full repeal since the latter would deprive the government of significant revenue and primarily help the wealthiest taxpayers in those states.
Payroll Tax Cut.
President Trump has called for a payroll tax cut for months, but the idea has been rejected by Democrats and largely ignored by Republicans. As negotiations on the latest round of stimulus progress and the election nears, President Trump is not giving up on the idea and is assessing ways via executive action to provide payroll relief to both employers and employees that each pay the 7.65% tax (Social Security and Medicare). It's unclear exactly what the President will propose, but we expect a decision any day now. The effects would likely be immediate and last through the end of the year. The President has the legal authority to defer the collection of payroll taxes, but they still must be repaid in the future. The President is trying to show his authority to circumvent a divided Congress in providing tax relief to employers and employees, but the scope of this potential assistance is just not known at this time.
US-China: Will the Phase 1 Trade Deal Survive?
US-China negotiators will meet next week (August 15) as part of a long-planned "progress update" to discuss phase one of their bilateral trade deal. However, US-China relations have taken a hard turn for the worse since the trade deal was announced in January, as reflected in this week's executive actions by President Trump on WeChat and Tencent. The dynamics surrounding the trade agreement are therefore much different than they were in January. Since that time, some parts of the trade deal have been honored, while other parts have not. As a result of the combined tensions that now characterize the relationship, both sides seem to have far less of an appetite for the trade agreement. The different motivations that brought both sides to an agreement seven months ago don't necessarily apply today. Nonetheless, the meeting next week should be positive and reiterate the commitment both countries have to the deal. Still, we sense this agreement is hanging by a thread, and both sides wouldn't mind if it didn't exist. But, neither side wants to be the one that abandons it out of fear of being assigned the primary blame for yet another bilateral breakdown.
The Department of Labor (DOL) recently put down a major marker in the growing political debate about environmental, social and governance (ESG) investing when it issued a proposal in June that would clarify the responsibilities of retirement plan fiduciaries when they consider ESG investments. The DOL would require fiduciaries to consider only economic factors when evaluating investments and would subject ESG investments to heightened scrutiny. The proposal was subject to a 30-day comment period that ended last week. Despite the relative brevity of the comment period, the DOL received a significant amount of feedback on its proposal, including criticism of it from the investment industry, which pushed back against the notion that ESG factors are not genuine investment considerations. The DOL leadership already has well-formed views on the issue and we expect them to finalize the rule without a major overhaul later this year. However, the rule has been opposed by a variety of Democratic lawmakers and would be a prime target for the DOL in a potential Biden administration.
The Final Word
As another week comes and goes, and another self-imposed deadline by the Biden campaign for naming a VP passes, it brings to mind the question: how important is the vice presidential nomination? Many consider a vice presidential candidate's ability to deliver his or her home state or region to be appealing and a core criteria to consider. However, this consideration has not been a major factor in recent years. In the past 50 years, there have been 18 individual vice presidential nominees, with only five of them from states that could be considered competitive. While those candidates won their home states more often than not, there is little evidence that they were the deciding factor in those states. Another important aspect of being selected the vice presidential nominee is that it is commonly viewed as a leg up for becoming the next presidential nominee. In the past 50 years, seven vice presidential nominees have gone on to run for president, and five of them have successfully won the nomination, though George H. W. Bush so far is the only one to successfully win the presidency. Biden's vice presidential pick eventually could be the future face of the Democratic party if Biden prevails this year. However, if Trump is re-elected, Biden's VP pick could follow the path of Hillary Clinton's choice in 2016 (remember Virginia Senator Tim Kaine?) in shying away from a future presidential run.